ARCB - NASDAQ

Greetings and welcome to the ArcBest First Quarter 2023 Earnings Conference Call. [Operator's Instructions] As a reminder, this conference is being recorded on Friday, April 28, 2023. I would now like to turn the conference over to Mr. David Humphrey, Vice President of Investor Relations. Please go ahead, sir.

Thank you for joining us. On today's call, we will provide an update on our business, walk you through the details of our recent first quarter 2023 results and then answer some questions. Joining me today for the prepared remarks are Judy McReynolds, Chairman, President and CEO of ArcBest; and David Cobb, Chief Financial Officer. In addition, Dennis Anderson, Chief Strategy Officer; Steven Leonard, Chief Commercial Officer and President of Asset-Light Logistics; and Danny Loe, Chief Yield Officer, are available to help answer questions. To help you better understand ArcBest in our results, some forward-looking statements could be made during this call. Forward-looking statements, by their very nature, are subject to uncertainties and risks. For a more complete discussion of factors that could affect ArcBest's future results, please refer to the forward-looking statements section of our earnings press release and our most recent SEC public filings. To provide meaningful comparisons, certain information discussed in this call includes non-GAAP financial measures as outlined and described in the tables in our earnings press release. Reconciliations of the GAAP financial measures to the related non-GAAP measures discussed in this call are also provided in the additional information section of the presentation slides. As a reminder, there is a conference call slide deck that could be found on the ArcBest website, arcb.com and exhibit 99.3 of the 8-K that was filed earlier this morning or you can follow along on the webcast. We will now begin with Judy.

Good morning. We appreciate you joining us today. I want to start by thanking our customers for the trust they place in us every day to keep their supply chains running. They are the reason our employees come to work each day to give it everything they have. As you've heard us say many times before, ArcBest is a company that thinks and plans for the future. We're always striving to anticipate the needs of our customers and the market, manage short-term and long-term risk and execute to the highest level. And it is this mentality that has driven our outperformance over the last several years. And nothing has changed as we face a softer economic environment leading to reduced customer demand industry-wide. Years ago, we expanded our solutions at ArcBest to better meet our customers' needs and we built our dynamic pricing offering that enhanced our pricing intelligence and has provided us the ability to profitably fill capacity precisely in the locations where we need it. Today, we have much better visibility into demand and costs across our business which provides the ability to make precise changes that have a meaningful impact versus taking a broad brush approach. And as the environment has evolved, we've doubled down on effectively managing personnel, costs and equipment while continuing to deliver our customer -- to our customers. The commitment to our growth strategy and disciplined cost management has demonstrated results. We continue to diversify our customer mix across the industries. We drove an average 10% increase in our customer base and retention remains solid across all segments of our business. While we experienced pressure on truckload spot rates which decreased from fourth quarter levels, we grew shipments and won new customers despite that trend. This is a testament to the strength of our truckload solution and our ability to balance contract and spot business levels based on the macro environment. In the asset-based business, industry pricing remains rational. ArcBest continues to price appropriately to reflect our high-quality service offering. Our core pricing is strong with a nearly 10% increase year-over-year. The dynamic pricing tool we built a few years ago enables us to precisely place profitable shipments throughout the asset-based network to fill underutilized capacity. We carefully manage the volume of transactional shipments to supplement our core LTL business based on market dynamics. Having this lever to drive profitable business has enabled us to largely avoid layoffs up to this point. While we showed resilience in our performance that has not deterred our focus on working efficiently and driving success through the power of our innovative integrated solutions. We are continuing to invest in key aspects of our company and strategy to accelerate revenue growth and build on the strong momentum underway. First, we continue to invest in technology. We are capitalizing on the strength of ArcBest's balance sheet, pursuing organic growth through new innovations that strengthen ArcBest's competitive edge. During the quarter, we announced our new freight movement system, Vaux and it has been incredibly well received by customers. Vaux which began as an employee idea is the first radical change to the freight handling process since the forklift was patented over a century ago. The industry has long demanded -- been demanding change and with Vaux, we delivered. Additionally, in the first quarter, we completed the Phase I rollout of City route optimization and innovation that has delivered strong returns. These are just a few examples of how our innovative spirit drives ArcBest forward. We continue to use tech to make our people more efficient and effective, like the implementation of a best-in-class CRM tool and other systems that enable our sellers to be more productive in their day-to-day activities. We've also invested in our solutions. We have strengthened our truckload offering one of the largest areas of growth opportunity and one that is bringing business opportunity to ABF as well. Additionally, ABF Freight was recently awarded the ATA excellence in claims and loss prevention award for a record 10th time. This is a testament to our ongoing commitment to excellence and the high bar we set for ourselves. Supply chains are complex. ArcBest keeps it simple. We strive to make it easy to do business, knowing this is what our customers expect. Since we began executing on this strategy in 2012 and then further in 2017 with our enhanced market approach, we have doubled the number of customers who are cross-sold and we continue expanding our relationships with these customers. And importantly, we have invested in our people. Hiring and retaining top talent is the foundation to our company's success; with the origin of Vaux starting as an employee idea being a prime example. Our culture of workforce training and development is core to who we are and why we have some of the best talent in the industry, enabling our organization to be exceptionally productive, efficient and agile. We're honored to rank in the top 20 on Training Magazine's 2023 Apex Awards list, a global ranking of organizations that excel at training and human capital management for the seventh consecutive year. We do not take this recognition lightly and we are committed to continuing to invest in our employees' success. During the pandemic, we rapidly contracted our workforce to meet lower business levels at the time. While we still have not refilled all those essential roles, we have successfully kept our trained experience and productive employees in place despite navigating a tougher labor market. As opposed to more deeply contracting our workforce, again, we expect that retaining our talent will enable us to capitalize more quickly when demand rebounds. It also benefits us in the short term by allowing us to better utilize our network resources and personnel to capture future opportunities as core customer needs increase, a win for ArcBest, our customers and our employees. In short, our objective is to drive sustainable growth, generate strong and resilient cash flow and deliver superior returns for our investors. Over the past few years and especially over the course of the pandemic, we've evolved tremendously. ArcBest is more agile than ever and we've proven that we can deliver results regardless of the economic environment. While we believe these macro challenges are temporary, we are confident that our versatility and breadth of integrated solutions puts us in a strong position to thrive in any environment. We remain as focused as ever on our long-term vision and proven strategy focusing on accelerating growth, increasing efficiency and driving innovation. Before I hand it over to David, I want to acknowledge two important things. First, earlier this month, we announced that effective May 14, Matt Beasley will be our new CFO. Matt has been with ArcBest since early 2022 and is working closely with David Cobb, who will retire in October to ensure a smooth and seamless transition. We look forward to welcoming Matt to the executive leadership team and we will certainly miss working with David. He is a tremendous member of our team and we wish him and his family the best in the next chapter of his life. And lastly, my most sincere thank you to the people of ArcBest, a century of business is no small feat. It's the people who show up to work every day eager to grow with us, who have helped us reach this important milestone. I'm grateful for the passion and the dedication of our team and I thank you for all you do. And now I'll turn it over to David to take you through the quarter in greater detail.

Thank you, Judy and good morning, everyone. Congratulations to Matt, who has already been significantly involved in important areas of our company. I am so appreciative of having served alongside an outstanding leadership team that is focused on long-lasting, important values and the execution of a customer-oriented growth strategy. I'm deeply grateful for the remarkable people in our company and specifically, I want to mention my sincere appreciation for our finance and accounting teams across the company. I'll begin by highlighting our consolidated results. The late February 2023 sale of FleetNet America, our fleet maintenance and repair service subsidiary has been reflected as discontinued operations in our consolidated results and our commentary will be for the remaining business or continuing operations. So first quarter 2023, consolidated revenue from continuing operations was $1.1 billion, a 13% per day decrease compared to last year. On a non-GAAP basis, consolidated operating income was $52 million, a decrease of 51%. Our adjusted first quarter earnings per diluted share was $1.58 per share. The effective tax rate that was used to calculate our first quarter non-GAAP EPS was 25.5%. And -- under current tax laws, we expect our 2023 non-GAAP tax rate to range from 26% to 26.5%. This may be impacted by discrete items throughout the year. ArcBest's cash balance and total liquidity remained at good levels. And as of the end of the first quarter, we had net cash of $115 million, an improvement of $54 million since the end of last year. Total liquidity of approximately $600 million remains at a healthy level and despite rising rates, the composite interest rate on ArcBest outstanding debt at the end of the recent quarter was 3.0%. Because of the financial strength stemming from our strong balance sheet and the operating cash flow we generate, we are investing in the business through equipment purchases, real estate additions and improvements and technology innovations, all of which will strengthen our competitive edge and ability to serve customers. We regularly review external growth opportunities and continue to target investment-grade credit metrics while prioritizing returning capital to shareholders through share repurchases and the quarterly cash dividend. Following the sale of FleetNet and the corresponding increase in our share repurchase program, we remain in a great position to return capital to shareholders. In mid-March, we entered a 10b5-1 trading program that allowed us to buy back shares during the current closed trading window. So far this year through yesterday, our settled share repurchases have returned approximately $29 million of capital to shareholders. And based on those share repurchases, $96 million remains available under the current repurchase authorization for future common stock purchases. In all areas of our business, we are focused on effectively managing personnel, equipment and other network resources to provide effective customer service while controlling costs. In Asset-Based, we are reducing cartage, purchase transportation, equipment rentals and other outside resources. An Asset-Light, additional reductions will be implemented in our employee-related and outside services costs to better align with the reduced business levels we are experiencing. When compared to first quarter 2023, these Asset-Light cost reductions are expected to be in a range of $2 million to $3 million for the second quarter. Turning to the key metrics in our Asset-Based business. First quarter revenue was $698 million, a decrease of 2% on a per day basis compared to last year. Asset-Based revenue was below last year due to reduced customer demand in our core business related to a soft economy which impacted customer order quantities and resulting shipment sizes with customer retention solid, as Judy mentioned. However, we were able to generate measured growth in our Asset-Based shipments and tonnage. First quarter daily shipments increased by 8% and tonnage per day increased 3%. The 4% decrease in the first quarter billed revenue per hundredweight versus last year reflects the change in freight mix resulting from strategically managing consistent business and personnel levels by utilizing our dynamic LTL pricing lever for profitable shipments. These actions are good for our customers and for our company. Excluding changes in fuel surcharges, first quarter pricing on our core LTL-rated business increased nearly 10% versus the same period last year. Pricing on that core business also increased sequentially compared to the fourth quarter. On Asset-Based customer contract renewals and deferred pricing agreements negotiated during the first quarter, we secured an average of 3.9% increase. While we have increased shipments, revenue per shipment is down from last year. As I mentioned earlier, our cost management efforts continue and we are benefiting from the recently completed Phase 1 rollout of our city route optimization project. As we look ahead, we are in a strong position to positively respond when the market inflects. The first quarter non-GAAP asset-based operating ratio of 92.3% was a year-over-year increase of 460 basis points. And on a sequential basis versus fourth quarter was an increase of 370 basis points which is comparable to our prior 4Q to 1Q periods. As mentioned last quarter, repairs and maintenance have been elevated due to inflationary cost and in part due to delays in receiving replacement equipment. Those costs are in the asset base line for fuel, supplies and expenses. Also, as mentioned last quarter, we were able to make good progress on optimizing our usage of outside resource costs with purchase transportation declining as a percent of revenue. As we look at April trends, the slowdown in the general economy and its impact on customer demand and resulting shipment sizes continues to impact our core business levels. On a preliminary basis and reflecting the inclusion of profitable transactional LTL shipments, our April 2023 asset-based tonnage is flat versus last year and shipments are running up about 4%. For additional details on our April 2023 trends, please refer to our Form 8-K exhibit to the press release. In our Asset-Light business, total first quarter revenue was $438 million, a decrease of 27% on a per day basis versus first quarter 2022 and due to the market-driven decrease in revenue per shipment during a continued soft environment combined with business mix changes. As we mentioned this time last year, our expedite and International Services were strong contributors in first quarter 2022, benefiting from favorable market conditions and project work. However, our first quarter 2023 truckload shipments grew sequentially versus fourth quarter as well as year-over-year and contributed to the segment's 1% increase in total shipments per day compared to first quarter 2022. First quarter asset-light non-GAAP operating income was $4 million and first quarter Asset-Light EBITDA was $6 million, both meaningfully below the same period last year. We provided preliminary Asset-Light business trends for April 2023 and the Form 8-K exhibit to the press release filed this morning and total revenue reflects a year-over-year decrease, slightly worse than the first quarter. Although shipments per day are running slightly higher in April 2023 versus April 2022, due to the challenges in the macro environment, current revenue trends in that business continue to be weak, reflecting the lower demand and declining spot rates. As I mentioned earlier, costs are being closely managed while positioning strategically for long-term growth. As an update on 2023 capital expenditures, we currently expect to achieve our plans for total 2023 net capital expenditures of $300 million to $325 million. In the first quarter, we brought on the remaining revenue equipment that carried over from 2022 and we expect to receive the 2023 equipment by the end of the year. As we discussed last quarter, real estate investments are ongoing throughout the Asset-Based network and include new facilities, facility replacements and upgrades to existing service centers. We remain focused on profitable growth and efficiently capitalizing on business opportunities. especially during challenging market environments, we are emphasizing cost management to minimize the impact on operating margins. Meeting customer needs remains a priority and our focus on helping customers navigate their supply chain challenges will benefit our business by preserving long-lasting relationships with them. Now, I'll turn the call back to Judy.

Thank you, David. As we close, I want to reflect again on our strategy and position. We continue to hear from our customers that our solutions are relevant and our partnership is valuable. This is why we continue to see both shipment and customer growth despite some of the demand decline our industry is experiencing. We have transformed our company in the last decade and have more than doubled our revenue over that period. We are nimble and precise in the way we manage our costs. And as a result, we have made significant improvements in our consolidated operating income and operating ratio. We are proud of our progress but we are just getting started. We are making data-driven intelligent decisions using our strategy as our North Star. We look at our company critically. This is one reason we were able to bring Vaux to market because we saw the opportunity to improve our own way of doing business and it's what enabled us to make the strategic decision to sell FleetNet. We need to stay focused on our core business and be willing to take significant action which we did and will continue to do. We are ready and well positioned for what's ahead and we're confident in our growth opportunity with an expanding pipeline of new business engagements that reflect our complete logistics service offering and with our visibility to an expansive volume of shippers' logistics spend. Our capabilities have never been stronger, supported by the investments that we've made to provide multimode shipping solutions. With the cash flow that our business generates and our solid balance sheet, we have also the financial capacity for acquiring strategic assets to enhance our service and drive additional growth. We're committed to keeping the global supply chain moving, delivering on our goals and driving growth as we look forward to our next 100 years. That concludes our prepared remarks. David Humphrey, we can now open the call up to questions.

Okay. Frank, I think we're ready for some questions.

[Operator Instructions] Our first question comes from Jack Atkins with Stephens.

Okay, great and good morning, everyone. And David, congratulations on your retirement and congratulations to Matt on his new role. So I guess, maybe first thing for me is just a housekeeping item. I mean just a lot of volatility this quarter in terms of the sale of FleetNet and everything else. I guess what do you guys view consensus for the first quarter? I mean I guess I'm calculating it, I think, at 167. I know there are some reports at $1.90. What do you guys view consensus earnings as for the first quarter?

Yes, Jack, I agree. It was $167 million. And yes, that was just based on the estimates that we had. I appreciate you mentioning that.

Yes. Okay. No problem. I just want to make sure that was clear for folks. I guess from my -- I guess, next question here, I'd love to dig into the leadership changes that you guys went through in the first quarter within the Asset-Light business. Can you maybe talk about that? Why did you make those changes? And I guess, what's the expected outcome from that, whether it's in terms of profitability or sort of business strategy?

Well, first of all, Jack, I want to say how excited I am about the Asset-Light solutions that we have and especially MoLo relatively recent acquisition that we made. And I made some of the changes that I thought were necessary and really required as we move forward. But just to speak to the leaders that we have in place, I mean, Stephen Leonard as Chief Commercial Officer and President of Asset-Light Logistics, a tremendously experienced leader, one that originally came from our Asset-Based business but has spent most of his last year's here with the company in the Asset-Light solutions, particularly truckload and ground expedite and then also as a leader in sales. And so really has the ability to bring all of that together in a powerful way with what we're trying to accomplish in the approach with customers. So excited about that. And I'll ask Stephen to comment about the MoLo leadership team that reports to him, that may be of interest. And then we'll see what he has to say here.

Yes. Thanks, Judy and thanks, Jack. We have a great leadership team in place at MoLo that the folks that are reporting to me are very experienced. They have -- all of them have over 10 years of experience in the industry and they've really grown up in that industry. And one of the things that I appreciate about their careers is they started in customer-facing, carrier facing, technology-based roles. So they're just very well positioned from an experience perspective. On top of that, we have just came together as a team really well over the last few weeks. We're making tremendous progress. We talked about we continue to add volume. We're adding customers. We've had record numbers of RFPs. And so we feel great about where we're headed and the team is in a really good place and we're moving forward. So it's exciting. We've talked a lot about it in terms of our strategy and what it brings to the table and that continues to be a priority for us. So we're super excited about where we're headed.

Yes. And I'll say one more thing about just the excitement. I mean, if you talk to any of our -- particularly our best salespeople, they are just over the moon with the truckload offering that we have and how well the MoLo team executes on that and the business model. So just I guess we'll leave that there.

Yes, sure. I guess, if I could squeeze one more in. It goes towards the dynamic pricing taking place within your asset-based business. That's coming at a much lower revenue per shipment, it seems like but you have a relatively elevated cost structure on a per shipment basis. So I guess, how do you convince investors that this is profitable market share that you're taking when revenue is down, call it, $7.5 million in the quarter but EBIT is down over $30 million. I guess how does that work for folks?

Jack, this is Danny. We've talked about the way we look at it. We're looking at an individual shipment making decisions. And we are confident that these shipments are profitable for our network. I think one of the things you mentioned, there's some concern when you talk about revenue per hundredweight and different things. And this is market-based price. But if you look at the math of revenue per hundredweight for us compared to others, if we match market price of some things, that could have some deterioration of revenue per hundredweight but that doesn't mean it's the wrong decision. Again, we're looking at the profitability of the shipment, not necessarily just what a revenue per hundredweight metric would be. And so we have the mechanisms, we have the model, we can float up or down. We're very confident that as our core business strengthens, the macro environment is obviously affecting our customers. But as those customers ship is increased, we have the -- we can simply been at that point, decide to handle those shipments as compared to the dynamic shipments that are in our network. And that's just something we've never had in the past to be able to do. In the past, if we had laid off people, if the business comes back, we have to go through the process of rehiring, retraining and getting people productive. So this is not only to us the best short-term answer, it's the best long-term answer as well.

Thank you Danny, appreciate it. Thanks Judy

Thank you.

Next question comes from Jordan Alliger with Goldman Sachs. Please proceed.

Yes, morning. I was wondering if you could give some additional thoughts around demand. I know you gave us the April data but thoughts around potential inflections in the overall freight environment. I know you guys are doing things to drive volume in separate from the economy but just sort of your thoughts on that. And with the flat tonnage or so in April, is that something that if -- do you expect normal trends so that you could have like a positive tonnage environment as we go through the entire second quarter?

Well, Jordan, I think just based on what we saw in the first quarter and into April, we certainly could one of the things that I really like about our visibility on customer opportunity with these expanded channels that we do business in. It just gives us the opportunity to see what's there. And as Danny mentioned, look at how well or not, that might work in our network. And that's just such a better position to be in. I will say this about what we characterize as our core business. The trends there for LTL have been down, you might look at the others that have reported and we're experiencing a similar thing on the core business side. But we also see that in our managed group whenever we're managing accounts. Typically, we're managing LTL business or truckload business. And there's a consistency there with what we're seeing as compared to what we see on the LTL side of the business. Now inflection, I think that is interesting. I mean there's always a discussion about that. And perhaps the best place to see some of that is in our truckload brokerage markets. And Stephen, I might ask you to comment about some of the conversations that we've had with the MoLo team about what they're seeing there because I think that's interesting, too.

Yes. In terms of where prices are and buy rates, it feels like we could be near the bottom. I think the question that everyone has is the most challenging one to answer is how long we're going to be there. And so that's kind of where we are on that. Again, we continue to focus on growth and adding the right partnerships that position us well for when the market does turn back. And so that's how we're thinking about it right now.

The other thing to add just real quick, Jordan, is when we look at our core business opportunities, we are still seeing good opportunities in our pipeline and we're pleased with that. We also see good Asset-Light opportunities in our pipeline. Things do take longer to get through some of these processes to onboard and that sort of thing. And I think there's just more scrutiny or more evaluation of those critical decisions for shippers but we're still seeing a lot to work on as far as bringing business into this company. And we're excited about how we can serve them. So -- but I hope that answers your question.

Yes, I appreciate it. Thanks everyone.

Thank you.

Our next question comes from Chris Wetherbee with Citigroup. Please proceed.

Good Morning guys. Maybe - back up on the dynamic pricing. And it seems like you've done a really good job of sort of keeping that separate from what your core LTL business is doing. I guess curious about how you're able to sort of put that wall, if you will, between sort of the businesses and wondering if there's risk that you get some leakage out of your core into what might be more of a transactional market. I'm not sure you necessarily see that much volume kind of moving back between those types of arrangements, transactional versus contractual. But how do you guys sort of approach that to sort of ensure that you don't lose volume out of what the better pricing business and have it fall into what is more transactional?

Sure, Chris. This is Danny again. I'll start off and maybe Stephen or Dennis may want to add in after that. But -- the key to this is we're meeting the customers and the channels they want to transact in. This transactional business that when we say dynamic, we're meeting customers that they're shopping ever shipment, making a shipment-by-shipment routing decision. So we don't see this crossover kind as you described, because we're not trying to change the customer's behavior. We're just kind of playing the game that the customer is playing there. And so the ability to separate it is really how that customer interacts and transacts with us. And so we'll continue to focus on that. And we do believe that we have a very good vision of what our core business is and what our transactional business is and the ability to be agile as we go through different times, it's really a daily type decision that we're making as we look at what the network is, what the network needs, what the market overall is doing. And we're able to adjust really daily to what our network is -- what type of shipments and what the price of those shipments are that we're putting in the network.

Okay, that's helpful. I appreciate that.

Well, I was going to say the -- what enables all of that is having a good understanding of your cost and cost visibility and we comment about that but it really has increased in the last few years. And I think that is the necessary part of this.

Yes. And Chris, one other thing that I just want to mention there is not only is that helping us with the networking capacity, that actually provides protection to our core business. If we were going through this cycle right now without the ability to do that and trying to lower cost that quick, it would put significant pressure on that core business. I don't know that I've ever seen our core business more profitable and healthy than it is right now.

Okay. That's helpful. I appreciate that color. And I guess just when you think about cost, you just want to kind of touch maybe a little bit on how you're thinking about sort of the year plays out and particularly on sort of the labor cost assumptions that maybe we need to start thinking about for the back half of the year. Anything to sort of think about that in terms of both head count, maybe and then the cost per employee as we think through the rest of the year?

Well, I think we are -- we all know going through labor contract negotiations. And so our current contract expires at the end of June. And I think if you don't have all the cost elements on that, we could really cover those with the off-line but on the wages and that sort of thing. We are making good progress on -- particularly in the supplement so far in labor negotiations. And we're just at the early stages of the economic terms that we're dealing with there. And so we'll know a lot more as we go through the next few weeks and couple of months. But outside of that, I think the work that we're doing to, again, based on the visibility that we have to better optimize those costs. I think the team at ABF has done a really good job of being able to bring that together. I mean we mentioned city route optimization. We have several different projects that we either have in place or we're working toward that optimize some of the biggest cost buckets that we have, whether it's city pickup and delivery, labor costs or line haul. And I think you've seen us bring to bear some of the cost reductions that are needed. We've hit mostly in the areas of purchase transportation, cartage, rented equipment and that sort of thing that were just -- they were very vital resources and variable resources for us whenever demand was at a higher level. Those are the types of actions that you can take to really emphasize the workforce that we have that is well paid and allows us to make sure that we have consistency in serving our customers as we move forward. But there's a lot to manage there but I'm proud of the ABF team as well as working with Danny and his yield team and sales to really get to the best answer.

And I'll just add to that, Chris, that Judy mentioned the big cost areas that have been focused on. But as our employee base continues to get more experienced, we're seeing improved productivity. In fact, we saw along with those cost reductions that Judy mentioned, improvement in our productivity on the dock areas. And so we're targeting our hiring. We're very, again, visibility about where we have those needs and knowledge of pending retirements. We're replacing as we need. So that's a close eye on all the cost, I think, is how we're managing this but adding -- having these profitable shipments enables us to be more strategic about all these areas.

Okay. That's very helpful. Appreciate the time. And congrats on Matt and David

Our next question comes from Scott Group with Wolfe Research. Please proceed.

Hey, good morning and congrats, David. So we're in this pretty bad freight environment. And if I look, your tonnage is never been up more sequentially from Q4 to Q1 than we just saw. And at the same time, your per hundredweight has never been down more from Q4 to Q1. So I get it's all transactional. I guess my question is do you think maybe we pushed that a little too far, right, when I just think about like margins down five points in Q1. I think you're guiding down about six points in Q2. Do you think we pushed the transaction a little too far?

Scott, this is Danny. I don't think we pushed it too far. I think it's something that we evaluate all the time. I'll tell you, when I view this, we're not going to add capacity for this business but capacity that we have and cost that we have, we want revenue to go against that. And so we'll continue to balance as we go forward with it. Again, these are incrementally profitable shipments that add to the profitability of the company in the short run with this. And it also allowing us to have a better longer-term answer for our customers to have capacity available for them. But we would not add capacity for these shipments as we look at it.

That's right. And Scott, I'll just say one more thing here. Obviously, we're going to watch and see what the economic environment brings to us and how that affects demand and that sort of thing. We are in a different labor market than we've been in. I mean despite the weakness in demand, we still -- it takes time to get to proficiency, as David mentioned but it also takes time to hire and put in place these replacements. And so if we see that we're going to be in a situation where we're making those drastic changes, like we did, for instance, during the pandemic, we really reduced headcount in, I'd say, March or April. -- of 2020, I think it was about 1,000 people at ABF and we still don't have all of those positions refilled. And so there is a penalty for that action as well. And we've got the opportunity, as we've described and we want to be able to seize on that opportunity when the time arises. And the other thing I'd say is that points to the pandemic, we had this dynamic tool in place back then, too. And it really helped us whenever we had that weakness in demand. And then as we saw business come roaring back in July of 2020, we manage that down and at an appropriate level. But again, there are several different elements here that we're trying to navigate. -- one of those being we want to get these people that we've hired over the last couple of years experienced proficient and productive and also ready for growth when things turn.

Okay. That makes sense. And then just lastly, I wanted to ask about the Teamster. And I know you don't want to talk about costs but maybe what are some of your key priorities, goals out of this contract. We got pension reform and the government since the last time we've had a contract. And where are some of the opportunities? And does it matter -- I mean there's a lot with the Teamsters right now. They've got UPS, TFI, now Yellow's getting a [indiscernible], does that make it -- how does -- what are the implications of the Teamsters having multiple negotiations on at the same time?

Well, I mean, I think it probably is a challenging situation. But I think for us, we have our schedule. We've been working at it. We've got a good plan together and that's where thing. And I think our goals are to achieve a market-based contract, one that allows us to have employees that are compensated as they should be and again, ready to move forward in a productive manner and for us to be positioned to grow. And I think those goals would align in a way that could create a successful outcome. But we've got several different elements to work through. And again, we're thankful that we have our schedule. We know what it is. And we've got some time here to go but look forward to being able to have a contract at the end of June when the other one expires.

Thank you.

Our next question comes from Ravi Shanker with Morgan Stanley. Please Proceed.

Thanks, morning everyone. Two big picture questions here. Judy, I want to start with your closing comments because it does feel like the last three months have been pretty busy for ArcBest. You don't normally -- you buy a lot of things you don't normally sell businesses, the personnel changes that you've discussed earlier, the buyback. It feels like there's a lot going on. Is this just spring cleaning at a 100-year-old company kind of sharpening pencils tightening belts? Or is anything structurally changing with your go-to-market strategy, your business model? Is ArcBest going to look very different three years from now than it does today?

Well, I want our company to really be successful in achieving those long-term targets and serving our customers even better in that three-year time frame. But to answer the question, I think about FleetNet, I've been involved with FleetNet since I came to the company back in 1997. I mean it was a subsidiary of -- I mean, of the WorldWay companies, you'll probably most remember Carolina Freight, it was merged into ABF but it was one of the other subsidiaries back then, it was called Carolina breakdown and we renamed it. But anyway, so we have done a lot with that business over time. One of the things is just the development of technology and the digital enablement of different parts of that business. And what we saw in it was that it needed greater scale. -- and asked ourselves based on our current priorities, were we willing to further invest in that business to gain that scale? Or did we think that there would be a better owner for FleetNet. And it just took a long time to try to get to the point of that being a success on both sides. And we really feel like it has. And so that's really it. I mean, it's a great team. We like that business. It's services, both ABF and our Panther owner-operators and has done it well. But for them, they needed to be a part of an organization that would provide more scale in the business that they were in. So we just saw it as a win-win.

Understood. Maybe as a follow-up on that kind of you mentioned the long-term target. So in light of some of these changes and maybe a down cycle that may have kind of overextended to the downside compared to what people have been expecting. Are those long-term projects going to spill in [indiscernible] of where do you think normalized mid-cycle EPS is for ArcBest? I think that's the number one question the market has right now?

Well, I think the way to look at that is to just focus on those long-term targets. But we -- what we would have is a move, if you excluded FleetNet from there that would put you maybe towards the lower end of that range. It's just making the pure adjustment for FleetNet. But we still see the growth opportunity that we've been mentioning. We have a pipeline that includes largely our Asset-Light solutions but also a healthy Asset-Based set of opportunities and we're really working hard to try to bring those about. So, we also -- as we're looking at those targets that have the longer-term margins in them, the opportunities to create greater efficiency in the business and we're very focused on that. But we feel like if we execute on our strategy, the opportunity that we have in front of us as well as being open to some M&A if that would be required to add scale in our -- really our already existing solutions. Also, we have Vaux that we announced this quarter and we really expect and anticipate that we're going to have success adding revenue there. So that could be an important element as well. I hope that answers your question.

Thanks. No, that's very helpful. Thank you. And also congrats to David and Matt

Thank you, Ravi.

Our next question comes from Ken Hoexter with Bank of America. Please procced.

Hey, good morning. Dave, thanks for the discussions over the past seven years or so and Matt, congrats on the new position. The -- can you talk about the percent of business that is now transactional and what that looked like a year ago? And then you noted that all-in pricing at the core was up high single digits. I just want to check, is that a subset that you've always given us the basis on? Was it just on core LTL? Or was it always the total company ex fuel?

Well, we've given both. We've -- but I think the core -- we've done that for some period of time. Don't you think that?

Yes, we have. Yes, yes.

And to discuss with you the transactional and relational or contractual percentages, they have moved some. But what I would say is it's not a material move on the Asset-Light side. A little bit more than 50% is that contractor relational. We have a spot quote opportunity there that tends to be around 40-ish percent or something like that. But that has expedite, truckload and dedicated in it. We have seen a move on the asset-based business because of the LTL transactional business. But I wouldn't get pegged to a specific percentage there because that's something that's moving every day as we're seeing published business opportunities. And so -- but obviously, it's more than it has been. But that -- it's not unusual for us to use transactional as an element for the Asset-Based business. Our U-Pack business as spot quoted. We have truckload, spot quoted business as well as this dynamic LTL business.

Just a little more color on that. I mean, just as was -- I can just clarify.

I just meant the Asset side, right? I just want to understand, given that's a big focus here of what's adding on this transaction. I'm just focused on the Asset side, what percent is now transactional, if you can give us a ballpark, a quarter or a third; anything?

Yes, Ken. I was going to give you a little more color there, is that when we talked about this earlier, is that our core business is down, is weak and it's similar to what you've seen in other public company disclosures around those tonnage business level reductions. And so we've been able to supplement and add with the transactional. So you can think of it in those terms. But as Judy mentioned, that's a daily, weekly management of those shipments. So it's a moving percentage sort of, so to speak.

One other thing, Ken, this is Danny. -- is in that transaction, there's a mix element of that as well, too. And so like Judy mentioned, even in the asset, we have the household goods shipments that are in the ABF network. We have some of the, what I kind of call intermediate volume type where we're trying to fill some empty backhaul lanes there to go along with the kind of what I think you're calling the dynamic LTL shipments. And so even a percentage there may not be accurate because you're going to have a big mixture change potentially of what makes up that percentage just with the mix of those different types of transactional shipments.

All right. If I could get a follow-up. TFI noted that it was in discussions about teaming up with you on real estate handoffs. They bought some equity. They sold a little bit of it. Anything you can share coming out of those discussions, potential opportunities you see in sharing any real estate or handoffs?

Yes, Ken. TFI did mention having collaborative discussions with us. And really, the best opportunity from those conversations was that we connected our real estate teams to evaluate potential properties that might be sold or leased. And that's really something we do in the normal course of business and we've been doing that with peer companies for decades

Okay. Thanks, Dave.

Next question comes from Jason Seidl with Cowen. Please proceed.

Thank you, operator. Hey Judy and team. First off, Dave, congratulations on the retirement. I wanted to go towards the pricing side in your supplement, you said the new contracts have been signed at 3.9%. Just curious, ahead of the labor agreement and with the other cost inflation, sort of is that level enough? Are we getting close to worrying about the contractual pricing getting too low? And then follow-up question, Judy, I think you also said that you haven't had to do any layoffs yet. You have flat tonnage. I mean, was that a comment that you think we might be getting near levels that we have to watch before layoffs come?

Well, I mean, I think where we are is in a position where we're always watching for that. I mean I don't think that there's anything that is a trigger there, so to speak. I mean, again, we're thinking long term, we want to be able to service our customers well and we're positioned to do that today. And as we mentioned, the labor environment is such that you really have to plan ahead. And so we see in our modeling, the attrition that comes from either turnover or more importantly, retirements that occur. And so we've always got to be in motion replacing those positions or we're going to end up in a position that we don't have the resources to serve our customers. So it's really about that. And then I think Danny wanted to comment about the deferred increase.

Right. I think [indiscernible], when we think through historically, the first quarter is going to be -- would be the weakest. I mean, the macro is different right now but that mixture that the combination of a transactional business, you would expect the core even though we're having pressure from our customers and less shipments from them, that gets better throughout the year. Now we can't -- we don't know what the macro is. But typically, we'd expect the first quarter to have the most pressure on us in this [ph].

Yes. And so what -- seasonally, we get better.

Correct.

We should expect that number to go up then when you report in 2Q, all other things being equal?

Well, Danny is getting ready to comment on the deferred increase.

Yes. So on the deferred, like I said, our core business is to me in a better shape than it's been. So the focus is making sure we secure increases above inflation. And so that's the focus on that. And so we'll know more as the contract to do but we're confident that we can demonstrate value to our customers and that we can -- as we demonstrate value to the customers, we can price our freight accordingly to the value presenting to them.

But given your outlook, is that 3.9% getting sort of close to your future cost inflation?

Well, we -- I think that remains to be seen. I mean I think that inflation has come down so far this year. And we're seeing, for instance, some pretty big drops in the purchased transportation that we use for line haul in terms of the pricing on that. So that's a big element or it can be a part of our cost, particularly in second and third quarter. And so we can see those elements of costs coming down. But on the other side, it's just we're working through the contract negotiations. We'll know more about that and we'll see how all of that comes together. But we have a long history here. I mean we've been doing this. This is our 100th anniversary as a company. I've been in my role, I think 14 years. And so we have navigated through these different circumstances, environments and situations and pricing is a strength of ours. I think all the elements that we bring together really further strengthen that. And so I'm confident in our ability to really navigate this to a good end.

Just to reiterate, this first quarter was our second best first quarter profit in our history. And you just think back to weaker environment times in the history of our company. And as others have been talking about comparing back to those weaker environments, if you look at our first quarter of 2019, this OR is 450 basis points better than that time period. So as Danny said, our -- the base core of our business is operating so much better and we are positioned strategically for growth and for the eventual upturn in this environment.

I appreciate the time as always, everyone.

Thank you.

Our next question comes from Bruce Chan with Stifel. Please proceed.

All right. Good Morning everyone and congrats on the retirement, David. Maybe if I could, just a parting question for you. You gave us some good color earlier on the projected cost savings for the Asset-Light business next quarter. Do you have a similar target for ABF given some of the PT and Cartage in-sourcing work that you're doing and maybe some of the P&D optimization efforts? And then you mentioned that 4Q to 1Q sequential OR trends were in line with historical norms. Just given what you've seen in the market, do you expect another kind of normal trend for 1Q into 2Q?

Yes. In our 8-K, we mentioned in the range of an improvement in our OR from first quarter to second quarter in the range of 200 basis points. And so that's, I think, a testament to how we're managing moving forward even in a weaker environment and managing the cost. You asked about cost. And so Judy mentioned many of those larger cost areas that we've been cutting. You think about on the Asset-Based side, there's a lot -- there's a mix of strategy and positioning there. Again, we talked about in earlier responses around the -- our emphasis on investing in our labor force and how that positions us well. And so while we're managing all that very closely, we have a longer-term view about this and the eventual upturn on it. But there are many cost areas that we're managing down, rentals, tractor rentals, trailer rentals, Cartage, local Cartage and again, targeted hiring, all that's in a very focused effort. So I'll just leave it at that. I think we've touched on a lot of those areas already.

Okay, great. That's super helpful. And then, just one quick follow-up maybe for you, Judy, on Vaux. Very interesting what's going on there. Can you just give us some color on what the ultimate plan is? Is this just something that's getting licensed? Or do you plan to deploy this in your own dock operations?

Well, we are piloting these, I guess, the Vaux freight movement system in different locations for ABF. I mean we have four total two that are really operational, running every day in a normal operation. And then we have Kansas City that's a pilot and then we just opened Salt Lake City, another pilot where -- and the reason we call them pilots is because we're experimenting with the approach that we use, the floor layout or the optimization techniques, different elements of better are being piloted. And so it's not a steady-state operation, although we think and feel like that Kansas City will be moving towards that as we move through the year. And so we are using it ourselves. And -- but yet what we've seen through the conversations that we've had with customers even prior to the launch this year, just a lot of excitement about what the possibilities were for them in their networks. And so I think the ProMat conference where this was really made most visible. We had lots of customers, really almost 1,000 badge swipes came through that booth. And really, what we find is that the Fortune 100 companies that are in retail, manufacturing and automotive industries, ones that are larger that have multiple warehouses and distribution centers, probably are the best to really talk in-depth for implementation but they're all different. And it's a little bit of a longer sales cycle. But what's been really fun is to see the customers that come to us with the solution already worked through. They're coming to us and saying, here's how we want to use this in our network. And we're doing a lot of visits with those customers. We're prioritizing the ones that have come to us that have an actionable plan because it takes work on both sides to be able to get this accomplished. It's a complex process but it's one where there's tremendous benefits when you can load and unload a trailer in minutes as opposed to nearly an hour, I mean, it just catches people's attention. It makes a big difference to them. And so we've invested a lot but we love the fact that we have the ability to utilize this within the ABF network. But more importantly, more broadly in these customer networks. And we just have a good team and a lot going on there and look forward to it being a way that the industry or our shippers are handling their freight.

Okay, that's great color. Thank you.

Thanks.

Frank, we've got time for one more. We're a little -- running a little over but I think we've got one more we'd like to take.

Our next question comes from Ari Rosa with Credit Suisse. Please proceed.

Great, thank you and David and Matt, congratulations. So just staying on the comment on Vaux, if I could. I'm still a little unclear on what it is. I just want to understand. So you're talking about unloading a trailer in a matter of minutes versus previously doing that in hours. Is it automated technology to unload a trailer? Maybe you could give us a little color on what it actually is? And is it something that's proprietary to ArcBest?

Yes. Well, first of all, it's patented. The process is patented and certain elements of the equipment are patented. And we can send you a video. Well, in fact, David Humphrey will do that. Send you a video that will really be worth a lot to you in terms of understanding. But it's the utilization of equipment along with a conventional forklift to -- and the equipment includes a mobile platform that you can load the freight that would otherwise be conventionally loaded or unloaded from a trailer. And so you're taking that platform and putting the shipments on it and loading it within minutes and then whenever it gets to destination unloading it within minutes. And normally, what you're doing as a forklift driver would be in and out of that trailer a number of times. And typically, it takes 45 minutes to an hour to do that. And so -- but the video that we have really illustrates that better than I could in the time we have left here. So -- and it's -- but it's exciting and something that we've worked on for many years.

Great. That's really helpful, Judy. I look forward to the video. And then just for my follow-up, kind of last question. It seems like you guys, obviously, with the sale of FleetNet, it seems like there's more of an intention to step up the buyback or be more aggressive on the buyback. I wanted to understand, is that management essentially expressing a view that the stock is structurally undervalued? Or why is that the best use of cash at this moment, especially given kind of the uncertainty on the macro? Maybe you could touch on that for a moment, thanks.

Well, certainly, your last comment is right. We are undervalued and we do feel like that's a good use of cash. But it is a part of an overall capital allocation that has a strong element of investment for replacement and growth in the organic -- in an organic way really in the business. We also have some innovation spend that's in there as well as the return of capital, both with dividends and with share repurchases. And we just -- we put this 10b5 plan in place so that we could continue to execute on that without having to take pauses for open trading windows and that sort of thing.

Okay, great. Thank you for the time.